Zintel Public Relations Commtouch Reports Fourth Quarter and Full Year 2012 Results

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1 PRESSS RELEASE Company Contact: Israel Investor Relations Contact: Brian Briggs, Chief Financial Officer Iris Lubitch Commtouch EffectiveIR U.S. Investor Contact: Commtouch Media Contact: Christopher Chu Matthew Zintel Grayling Zintel Public Relations FOR IMMEDIATE RELEASE Commtouch Reports Fourth Quarter and Full Year 2012 Results Fourth Quarter 2012 Revenues of $6.8 Million, Up 22% Sequentially, Up 14% Versus a Year Ago 1 P a g e Full Year 2012 Revenues of $23.9 Million, Up 4% Year-over-Year Formal Launch of New Cloud-Based Security-as-a-Service Offering in Early 2013 Highlights Execution on Strategic Roadmap and Foundation for Future Growth 2013 Full Year GAAP Revenue Growth Forecasted to be 42% to 46% Above 2012 Level McLean, VA February 20, 2013 Commtouch (NASDAQ: CTCH), a leading provider of Internet security technology and cloud-based services, today announced its fourth quarter and full year 2012 financial results for the period ending December 31, Fourth Quarter & Full Year 2012 Financial Highlights: Revenues in accordance with US Generally Accepted Accounting Principles (US GAAP) totaled $6.8 million for the fourth quarter compared to $5.6 million for the sequential third quarter of 2012 and $6.0 million in the fourth quarter of Full year 2012 revenues totaled $23.9 million, an increase of 4.0% as compared to $23.0 million in Non-GAAP revenues totaled $7.0 million for the fourth quarter compared to $5.6 million for the sequential third quarter of 2012 and $6.0 million in the fourth quarter of Full year 2012 non-gaap revenues totaled $24.1 million, an increase of 5.0% as compared to $23.0 million in The difference between non-gaap and GAAP revenue is derived from the fact that deferred revenues

2 consolidated from acquired companies are recorded based on fair value rather than book value for GAAP purposes. In the fourth quarter of 2012, Commtouch closed the previously announced acquisitions of FRISK Software International s antivirus business as of October 1, 2012 and eleven GmbH as of November 16, During the fourth quarter and full year, the company recognized expenses totaling approximately $0.4 million and $0.8 million in the respective periods related to acquisition related costs. Fourth quarter and full year 2012 GAAP net income (loss) and earnings per diluted share data include the impact of the aforementioned acquisition and related costs. GAAP net income (loss) for the fourth quarter was ($0.5 million) compared to net income of $19,000 for the sequential third quarter of 2012 and $1.3 million in the fourth quarter of Full year 2012 GAAP net income totaled $1.5 million compared to $4.6 million in Fourth quarter and full year 2012 data includes the aforementioned acquisition related expenses. GAAP earnings per diluted share for the fourth quarter were ($0.02), compared to $0.00 for the sequential third quarter of 2012 and $0.05 in the fourth quarter of Full year 2012 GAAP earnings per diluted share were $0.06 compared to $0.19 in Fourth quarter and full year 2012 data includes the aforementioned acquisition related expenses. Non-GAAP net income for the fourth quarter was $0.3 million compared to $0.7 million for the sequential third quarter of 2012 and $1.7 million in the fourth quarter of Full year 2012 non-gaap net income totaled $3.9 million compared to $6.4 million in 2011 and was marginally lower than anticipated primarily due to an increased strategic investment in the company s global sales and marketing function to leverage Commtouch s expanded portfolio of IT security solutions. Non-GAAP earnings per diluted share for the fourth quarter were $0.01, compared to $0.03 for the sequential third quarter of 2012 and $0.07 in the fourth quarter of Full year 2012 non-gaap earnings per diluted share were $0.16 compared to $0.26 in Cash used for operating cash activities during the quarter was $1.6 million, which included payments for professional service fees and other acquisition related costs associated with the two acquisitions that closed during the quarter. Cash as of December 31, 2012 was $5.1 million, compared to $17.3 million as of September 30, Cash usage during the quarter included the net purchase price payments of $10.2 million, as well as payments for transaction and integration costs associated with the two acquisitions completed during the quarter. 2 P a g e

3 Brian Briggs was appointed as Commtouch Chief Financial Officer. Briggs brings more than 22 years of finance and operations experience, offering extensive expertise in profitability building in public companies. Shlomi Yanai, Commtouch s chief executive officer stated, The fourth quarter culminated 2012 with renewed revenue growth and tremendous progress on our transformation into a provider of comprehensive SecaaS offerings, which was accelerated by our strategic acquisitions. Commtouch s new Security-as-a-Service solution marks a major launch of the Company s latest cloud-based offerings and is complemented by new solutions focused on Security On-Premise for Service Providers and Mobile Security Services for Android. All three solutions were recently launched into the market and have generated great initial customer interest. Our material progress on executing this strategy and deploying our new offerings has successfully set the stage for double-digit revenue growth in On the financial front, fourth quarter and full year sales marked Commtouch s return to top-line growth, while acquisition related transaction and integration expenses, combined with an increased investments in global sales and marketing infrastructure, contributed to lower bottom-line profitability. New bookings growth remained strong in the fourth quarter and full year, doubling new bookings compared to the levels seen in the year ago period. Organic new bookings growth, combined with the synergies of our late 2012 strategic acquisitions, put Commtouch on track to realize full year 2013 revenue growth in the range of 42% to 46% over We remain committed to investing in our enhanced sales and marketing platform to fully leverage the value of our innovative new SecaaS offerings among customers and partners worldwide, all while continuing to fund our growth through internal cash flow generation and with a focused commitment to improving bottom line profitability. Building on Commtouch s progress in 2012, we are focused on increasing our market share in the fast growing markets for cloud-based , Web and antivirus solutions, including the launch of our new cloud-based web security solution which is currently on track for release in third quarter of Our solutions are aimed at helping our customers quickly and easily add cloud-based offerings under their own private label brand, allowing them to maximize performance, generate new revenue streams, reduce product launch times and greatly lower their costs. Based on the strength of our expanded portfolio of cloud-based IT security solutions as well as the integration and streamlining of our recent acquisitions, we are setting a solid foundation for growth in 2013 and beyond, concluded Mr. Yanai. Announced in May of 2012, Commtouch s Board of Directors authorized the initiation of a stock repurchase program of the company's ordinary shares in the open market, in an amount in cash of up to $2.5 million. During the fourth quarter Commtouch repurchased 105,000 shares at an aggregate cost of approximately $0.3 million. As of December 31, 2012, approximately 767,000 shares have been repurchased through the program at an aggregate cost of approximately $1.7 million. 3 P a g e

4 For information regarding the non-gaap financial measures discussed in this release, please see Use of Non-GAAP Financial Information and Reconciliation of Non-GAAP to GAAP Financial Information. Business Highlights: Commtouch closed the previously announced acquisition of FRISK Software International s antivirus business, accelerating the deployment of an expanded range of OEM and service provider antivirus solutions, including private label solutions. Commtouch announced and closed the acquisition of eleven GmbH, which has captured more than 36 percent of the Germany s market for managed security. eleven GmbH is currently Germany s leading provider of based Security-as-a-Service (SecaaS) providing advanced solutions and services to some of the largest organizations in Germany, such as BMW, SAP, Siemens and Deutsche Telekom / T-Online. The acquisition of eleven has enabled Commtouch to accelerate to early 2013 the launch of private label cloud-based security solutions designed for OEM and service provider markets, as well as extend Commtouch s global sales and marketing reach across Europe and beyond. Significant investment in expanding the Company s global sales and marketing capabilities delivered sharply higher new booking activity during the fourth quarter. As a result, overall new booking activity for the full fiscal 2012 year was approximately double the level in 2011 setting a solid foundation for future growth. In line with Commtouch s long-term agreement model, the majority of contracts signed average approximately three years in length. Revenue recognition for these new multi-year contracts is expected to begin ramping up and positively impacting Commtouch s top-line in the coming quarters. Key new client wins during the quarter reflected our enhanced international sales and marketing penetration, including: o Openwave Messaging Inc., the leading global provider of innovative messaging software solutions, selected Commtouch as its preferred messaging security partner for integrating Commtouch s anti-spam and virus outbreak detection into its messaging platform for carriers and service providers. o i7 Networks integrated Commtouch s GlobalView URL categorization technology into its i7 solutions. India based i7 offers its corporate clients a suite of products that help manage Web content classification and bandwidth monitoring, including URL filtering based on the best of breed URL content categorization databases. o NSFOCUS Information Technology Co., Ltd, a China based global leader in providing enterprise-level network security solutions and services, selected Commtouch s antivirus and URL filtering solutions. 4 P a g e

5 Business Outlook Based on the current expectations, the company is announcing its financial outlook for the full year The company anticipates full year 2013 revenue will be between $34.0 million and $35.0 million, an increase of approximately 42% to 46% compared with full year GAAP and non-gaap net income guidance includes a higher level of sales and marketing expense versus 2012 to support a strengthened global sales platform. Full year 2013 GAAP net income is expected to be greater than $2.0 million and non-gaap net income is expected to be greater than $3.5 million. During the first half of 2013, the company also expects to recognize extraordinary expenses related to its previously announced acquisitions, as well as related integration and streamlining expenses, totaling approximately $0.8 million, the majority of which will be recognized in the first quarter of The impact of these charges is reflected in the aforementioned full year 2013 GAAP net income guidance. The company expects the impact of integration and streamlining activities to positively impact the financial performance of the business during the second half of The company plans to continue to strategically invest in the build-out of its global sales and marketing efforts. The impact of these investments is reflected in the full year 2013 GAAP net income guidance. The above outlook is as of the date of this release, and the company undertakes no obligation to update its estimates in the future. Use of Non-GAAP Measures Non-GAAP financial measures consist of GAAP financial measures adjusted to exclude: share based compensation expenses, amortization and impairment of acquired intangible assets, deferred taxes, acquisition related costs and adjustments to earnout obligations. The purpose of such adjustments is to give an indication of the company s performance exclusive of non-cash charges and other items that are considered by management to be outside of the company s core operating results. The company s non-gaap financial measures are not meant to be considered in isolation or as a substitute for comparable GAAP measures, and should be read only in conjunction with the company s consolidated financial statements prepared in accordance with GAAP. Company management regularly uses supplemental non-gaap financial measures internally to understand, manage and evaluate our business and make operating decisions. These non-gaap measures are among the primary factors management uses in planning for and forecasting future periods. The company believes this adjustment is useful to investors as a measure of the ongoing performance of our business. The company believes these non-gaap financial measures provide consistent and comparable measures to help investors understand the company s current and future operating cash flow performance. These non-gaap financial measures may differ materially from the 5 P a g e

6 non-gaap financial measures used by other companies. Reconciliation between results on a GAAP and non-gaap basis is provided in a table immediately following the Consolidated Statements of Income. The presentation of this non-gaap financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Management uses both GAAP and non-gaap measures when evaluating the business internally and therefore felt it important to make these non-gaap adjustments available to investors. Financial Results Conference Call The company has scheduled a conference call later today, February 20, 2013 at 10:00 a.m. ET to review the fourth quarter and full year 2012 highlights, as well as walk through a strategic overview of the evolution of the company s growth strategy. To participate, please call one of the following teleconferencing numbers by dialing in at least ten minutes before the conference call commences. If you are unable to connect using the toll-free numbers, please try the international dial-in number. US Dial-in Number: Israel Dial-in Number: International Dial-in Number: at: 10:00 a.m. Eastern Time, 7:00 a.m. Pacific Time, 3:00 p.m. UK Time, 5:00 p.m. Israel Time The call will be simultaneously webcast live from a link on Commtouch s website at For those unable to listen to the live call, a webcast replay of the call will be available from the day after the call in the investor relations section of Commtouch s corporate Web site. About Commtouch Commtouch (NASDAQ: CTCH) is a leading provider of Internet security technology and cloud-based services for vendors and service providers, increasing the value and profitability of customers' solutions by protecting billions of Internet transactions on a daily basis. With six global data centers and renowned technology, Commtouch's , Web, and antivirus capabilities easily integrate into customers' products and solutions, keeping more than 350 million end users safe. To learn more, visit 6 P a g e Blog: Facebook: LinkedIn:

7 Recurrent Pattern Detection, RPD, Zero-Hour and GlobalView are trademarks, and Commtouch is a registered trademark of Commtouch. U.S. Patent No. 6,330,590 is owned by Commtouch. All other trademarks are the property of their respective owners. This press release contains forward-looking statements, including projections about our business, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of For example, statements in the future tense, and statements including words such as "expect," "plan," "estimate," "anticipate," or "believe" are forward-looking statements. These statements are based on information available to us at the time of the release; we assume no obligation to update any of them. The statements in this release, including the company s expectations that i) it will meet its 2013 revenue and profit forecasts, ii) its new service offerings will impact those forecasts in the positive manner indicated, and iii) the result of integration and efficiency activities will be to positively impact the financial performance of the business during the second half of 2013, are not guarantees of future performance and actual results could differ materially from our current expectations as a result of numerous factors, including business conditions and growth or deterioration in the Internet market, commerce and the general economy, both domestic as well as international; fewer than expected new-partner relationships; competitive factors, including pricing pressures; technological developments, and products offered by competitors; the ability of our OEM partners to successfully penetrate markets with products integrated with Commtouch technology; a slower than expected acceptance rate for our newer product offerings; availability of qualified staff; and technological difficulties and resource constraints encountered in developing new products, as well as those risks described in the text of this press release and the company's Annual Reports on Form 20-F and reports on Form 6-K, which are available through 7 P a g e

8 Three months ended Twelve months ended December 31 December Unaudited Unaudited Unaudited Unaudited Revenues $6,785 $5,950 $23,910 $23,016 Cost of revenues 1,367 1,124 4,350 4,091 Gross profit 5,418 4,826 19,560 18,925 Operating expenses: Research and development 2,185 1,444 6,281 5,410 Sales and marketing 1,866 1,639 5,860 5,486 General and administrative 2,374 1,615 6,639 4,721 Total operating expenses 6,425 4,698 18,780 15,617 Operating profit (loss) (1,007) ,308 Financial income (expenses), net (70) (23) 80 (27) Income (loss) before taxes (1,077) ,281 Tax Benefit,net 530 1, ,317 Net income (loss) attributable to ordinary. shareholders ($547) $1,275 $1,485 $4,598 Basic earnings per share ($0.02) $0.05 $0.06 $0.19 Diluted earnings per share ($0.02) $0.05 $0.06 $0.19 Weighted average number of shares outstanding: COMMTOUCH SOFTWARE LTD. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In US$ thousands, except per share amounts) Basic 25,357 23,854 24,610 23,620 Diluted 25,598 24,828 25,140 24,654 8 P a g e

9 9 P a g e Three months ended Twelve months ended December 31 December Unaudited Unaudited Unaudited Unaudited GAAP operating profit (loss) ($1,007) $128 $780 $3,308 Stock-based compensation (1) ,289 1,230 Other acquisition related costs (2) Amortization of intangible assets (3) ,003 Executive terminations (4) Adjustment to deferred revenues (5) Adjustment to earnout obligation (6) (19) 200 (19) 396 Non-GAAP operating profit $193 $1,664 $3,758 $6,333 GAAP net income ($547) $1,275 $1,485 $4,598 Stock-based compensation (1) ,289 1,230 Other acquisition related costs (2) Amortization of intangible assets (3) ,003 Executive terminations (4) Adjustment to deferred revenues (5) Adjustment to earnout obligation (6) Income taxes (7) (607) (1,198) (806) (1,385) Non-GAAP net income $269 $1,653 $3,908 $6,383 GAAP earnings per share ($0.02) $0.05 $0.06 $0.19 Stock-based compensation (1) Other acquisition related costs (2) Amortization of intangible assets (3) Executive terminations (4) Adjustment to earnout obligation (5) Income taxes (6) (0.024) (0.048) (0.032) (0.056) Non-GAAP earnings per share $0.01 $0.07 $0.16 $0.26 Numbers of shares used in computing Non-GAAP earnings per share (diluted) 25,598 24,828 25,140 24,654 (1) Stock-based compensation Cost of revenues $26 $7 $53 $24 Research and development Sales and marketing (69) General and administrative $191 $365 $1,289 $1,230 (2) Other acquisition related costs General and administrative (3) Amortization of intangible assets COMMTOUCH SOFTWARE LTD. RECONCILIATION OF SELECTED GAAP MEASURES TO NON GAAP MEASURES (In US$ thousands, except per share amounts) $400 - $777 $53 Cost of revenues $128 $48 $272 $195 Sales and marketing $286 $628 $589 $1,003 (4) Executive terminations Research and development - $82 - $82 General and administrative $115 $343 $115 $343 (5) Adjustment to deferred revenues Revenues $227 - $227 - (6) Adjustment to earnout obligation General and administrative ($19) $200 (19) $396 Financial expenses (income), net $204 $240 $232 $541 (7) Income taxes Deferred tax asset - tax benefit (607) (1,198) (806) (1,385) ($607) ($1,198) ($806) ($1,385)

10 COMMTOUCH SOFTWARE LTD. CONDENSED CONSOLIDATED BALANCE SHEETS December 31 December Unaudited Audited In US$ thousands Assets: Current Assets: Cash and cash equivalents $5,137 $20,868 Trade receivables, net 5,996 2,838 Deferred income taxes 2,239 1,996 Prepaid expenses and other accounts receivable 1, Total current assets 14,875 26,165 Long-term lease deposits Severance pay fund 756 1,031 Property and equipment, net 1, Deferred income taxes 3,348 2,889 Intangible assets, net 37,479 7,297 Investment in affiliate 1,403 1,227 Total assets 59,526 39,534 Liabilities and Shareholders Equity Current Liabilities: Accounts payable Employees and payroll accruals 2,280 1,215 Accrued expenses and other liabilities 1, Deferred revenues 4,535 3,058 Other short term liabilities 4,247 3,372 Total current liabilities 13,408 8,824 Long-term deferred revenues Long-term deferred tax 3,330 - Other Long term liabilities 6,659 - Accrued severance pay 915 1,192 Total liabilities 11,396 1,886 Shareholders equity 34,722 28,824 Total liabilities and shareholders equity $59,526 $39, P a g e

11 Three months ended Twelve months ended December 31 December Cash flow from operating activities Unaudited Unaudited Unaudited Unaudited Net income (loss) ($547) $1,275 $1,485 $4,598 Adjustments: Depreciation Compensation related to options issued to employees and consultants ,289 1,213 Amortization of intangible assets ,005 Changes in assets and liabilities: Decrease (Increase) in trade receivables (704) 598 (2,194) 130 Decrease in deferred taxes (608) (1,198) (807) (1,385) Decrease (Increase) in prepaid expenses and other receivables (541) (79) Increase in accounts payable Increase (decrease) in employees and payroll accruals, accrued expenses and other liabilities (1,022) 419 (860) 981 Increase (decrease) in deferred revenues 299 (301) (163) (390) Increase (decrease) in accrued severance pay, net (2) 66 Net cash (used in) provided by operating activities (1,555) 2,226 (347) 6,701 Cash from investing activities Payments for business acquisitions, net of cash acquired (10,243) - (10,243) - Change in long-term lease deposits (12) 3 (17) 1 Investment in an affiliate company (176) - (3,576) - Purchase of property and equipment (176) (104) (805) (526) Net cash used in investing activities (10,607) (101) (14,641) (525) Cash flows from financing activities COMMTOUCH SOFTWARE LTD. CONDENSED CONSOLIDATED CASH FLOW DATA (In US$ thousands) Buyback of shares (279) - (1,720) - Proceeds from options and warrants exercised 157 1, ,260 Net cash (used in) provided by financing activities (122) 1,097 (830) 1,260 Effect of exchange rate changes on cash Increase (decrease) in cash and cash equivalents (12,284) 3,222 (15,818) 7,436 Cash and cash equivalents at the beginning of the period 17,334 17,646 20,868 13,432 Cash and cash equivalents at the end of the period $5,137 $20,868 $5,137 $20, P a g e